All efforts are being made by India’s top mobile operator Bharti Airtel and South African MTN to close the proposed $24 billion deal that would lead to the creation of one of the world’s largest transcontinental mobile phone carriers with annual sales of $20 billion and a wireless subscriber base of over 200 million.
The efforts till now have been focused on firming up the deal by the end of September but according to industry sources, it may take a while longer. The South African communications minister Siphiwe Nyanda has reportedly expressed doubts over the Bharti-MTN deal. Nyanda does not think the deal will get the required support from the government as MTN is a South African company with a footprint in Africa and the government is keen it remains so, despite the fact that the deal with Bharti Airtel will bring to the table several benefits for the South African operator.
At the moment, the two sides are keen to satisfy the queries raised by the South African government/regulatory authorities, most of them related to the management structure of the proposed entity. The South African government will give its approval only once the exclusive talks between the two operators are over.
The companies have been in exclusive talks with the intention of undertaking a full merger in a cash-and-shares deal worth about $24 billion. The deal, as was proposed in May 2009, involves a complex structure in which both firms would pay cash and equity for stakes in each other. While Bharti Airtel would pick up 49 per cent stake in MTN, the South African telecom major and its shareholders would get a 36 per cent economic interest in Airtel.
From Airtel’s perspective, a full merger is key. It will give it management control over the South African company as well as access to MTN’s cash flows and enable it to realise greater synergies. For MTN, the rationale for the transaction, according to its officials, is compelling as it includes diversification and synergistic benefits. It also addresses the company’s objective of becoming a dominant telecom company in the emerging markets.
As it stands, there is a good chance that the contours of the earlier proposal may be changed. Airtel had earlier informed India’s market regulator, the Securities and Exchange Board of India (SEBI), that its equity expansion will only be in the form of global depository receipts (GDRs) that would be listed on the Johannesburg Stock Exchange, implying that the South African company’s entire 36 per cent holding in the Indian company (25 per cent through MTN and 11 per cent through its shareholders) would be in the form of GDRs.
In other words, Airtel had earlier proposed to pay all MTN shareholders 86 rand per share along with half a share of Airtel in the form of a GDR. This is being recalculated, depending on investors wanting the entire amount in cash or in shares.
According to some reports, Airtel is considering the possibility of increasing the cash component of the deal by reducing the share of GDRs. While according to the initial plan, Airtel was to buy 36 per cent of MTN shares for $7.6 billion at 86 rand per share, it may now be looking to increase the offer by 7 per cent (mainly on account of the appreciating South African rand against the US dollar) to $14 billion ($10 billion in cash and $4 billion in stocks) for a 49 per cent stake in MTN.
Airtel may reportedly also be open to paying some of MTN’s larger shareholders in dollars instead of rand. In fact, Airtel and MTN are known to have been in talks with the South African Reserve Bank on the issue of paying foreign institutional and other institutional shareholders of MTN in dollars. This also protects Airtel from currency fluctuations.
For funding the deal, the company is also looking to borrow more than the originally planned $5 billion. According to reports, Airtel is planning to borrow $3$3.5 billion from eight foreign banks and $1.5-$2 billion from Indian lenders.
Of course, with neither company commenting on the ongoing talks, there is a lot of speculation and conjecture about the details at the moment. With very little time to go before hitting the Septemberend deadline for exclusive talks, it is hoped that a conclusive decision is reached as the “uncertainty is becoming uncomfortable”, as an MTN official puts it.
